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Thursday, July 17, 2008

The View From The Malls (Msia)

Source : The Business Times, July 17, 2008

By ALLAN SOO

THE Klang Valley retail market saw a turning point last year as the sector became more mature and saturated. Although the market is not fully saturated in terms of successful centres by number, it is nevertheless now more difficult for retailers to increase turnover by same-store sales. The saturation is in the hot spots and this is where most retailers are worried about the future of retailing in terms of profitability and even sales turn-over.

Recent additions: The KL Pavilion, The Gardens and Sunway Pyramid's extension (left) each have at least 800,000 sq ft of net lettable area

The opening of three major shopping centres, all in September, taxed not only the retailers' expansion capacity and the industry's ability to support it with infrastructure and human resources, but even the consumers' disposable income. The KL Pavilion, The Gardens and Sunway Pyramid's extension each have at least 800,000 sq ft of net lettable area.

All three malls started with high rents nevertheless, and KL Pavilion has had tremendous support from retailers convinced it is the next Kuala Lumpur City Centre (KLCC), so rents have reached RM45 per sq ft for good ground floor space. Occupancies are high in all the new shopping centres but the opening was slow as some brands were still waiting for the spring collection before opening their doors.

There is a general consensus that there is too much of the same thing and that the brands are too highly positioned in some of these centres. Malaysia may not be quite ready for the likes of Takashimaya or Siam Paragon and 4.2 million sq ft of new space in one year is definitely too much all at once.

Last year was Visit Malaysia Year which was expected to boost retail sales. Certainly, KLCC showed a 14 per cent increase in sales in 2007 to RM2.3 billion, up 14 per cent from 2006. In fact, most retailers in KL Pavilion reported better sales to tourists than locals.

Overall, some existing shopping centres continued to do well, with malls like the Curve attracting a consistent two million visitors a month and rents above RM16 psf for food outlets, while KLCC's top rents are now a gross RM80 psf.

By contrast, the results for 2008 have been poor, as anticipated. The first quarter was good, as can be expected of the seasonal sales period, with some retailers, including department stores, reporting improved year on year sales.

But the second quarter has been a major letdown and many retailers have seen double-digit erosion in their sales, particularly fashion items.

March and April have traditionally been quiet months but cosmetics and fashion trades are seeing this stretching to May and June, which is unusual. This is happening in the city outlets of department stores, much to the surprise of the suppliers.

We believe this is due to the dilution of retail in the city with the opening of the new shopping centres coupled with poor sentiment in the market. Some retailers have noticed a considerable drop in sales in the aftermath of the March elections. More worrying now is the impact of the huge increase in petrol prices which has had an almost immediate impact on retailers. The best malls in the city are now reporting at least a 5-7 per cent drop in traffic, with a normal Sunday crowd falling from 120,000 to 112,000 two weeks ago, for instance. Many consumers are already beginning to cut down on eating out and weekly purchases.

The overall market sentiment is weak and the expectation is that this will continue throughout the year. On the brighter side, some outlets are continuing to expand and the entry of food outlets like Krispy Kreme and Food Republic is a boost to the market. Standards are definitely higher now, and with keener competition, most shopping centres are not leaving their promotions and tenant mix to chance.

There are now 111 shopping centres and hypermarkets, with space totalling 37.56 million sq ft. Altogether, there were 10 new shopping centres with 4.2 million sq ft of space added in 2007. This is the largest single addition to supply in any one year. It works out to 6.47 sq ft of net retail space per person in the Klang Valley, which has a population of 5.8 million people.

By 2010, another bunching up will occur, as newer planned shopping centres are completed. Another five million sq ft will be added, and it is possible that even the suburbs will see a dilution of rents and turnover when this happens.

Occupancies rose in 2007, marking a gradual rise in the performance of the sector overall, although the poorer malls would be filled with non-retail trades in many cases. As at Q1 2008 the occupancies were:

We expect that the new malls will start polarising the trade so that eventually some casualties will show up in the older ones, and as a result, occupancies may drop this year.

There were a significant number of transactions mainly as a result of Reits hunting for retail assets last year in a market depleted of sellers. Three shopping centres were sold to Reits or their precursors and this is an important milepost in that it marks a shift finally towards a more investment-led retail property market. The sale of the Mines to CapitaLand at 7.75 per cent yield shows the market's preparedness to work on potential upsides for less than prime locations.

We believe 2008 will see more off-the-plan transactions and yields falling below 6 per cent as more Reits or fund-driven money come into the market.